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New Math

By now you’ve all seen the new spending that’s on the agenda. As with the US stimulus package, there’s a lot of pork for special interest groups. Two points from the article, taken together, are somewhat amusing:

“TREASURER Wayne Swan has unveiled a $42 billion Nation Building and Jobs Plan…”

“But the package cannot prevent a more than $40 billion turnaround in the budget…”

Gee, I wonder how they figured that out?!

At a price-tag of $42b, they could have eliminated payroll tax in every state for a couple years… but I’m sure they spent the money wisely. Amongst other things, the “package” includes:

$4.7b for schools (mostly buildings)

$6.6b for housing

$3.9b for “green incentives”

$12.7b in direct payments

$2.7b in tax cuts (that’s it?!)

Do they expect this to help?

“It estimates the plan will support up to 90,000 jobs over the next two years.”

$42b/90,000 = $466,667 per job. Wow!

Of course, they claim that two thirds of the money was on “long-term investments to generate future growth,” so it’s really only $155,556 per job. That’s better.

22 thoughts on “New Math”

In case anyone hasn’t seen it already, here is Cato’s Daniel Mitchell explaining why such stimulus spending won’t create jobs. I suspect he overlooks some of the finer points of Keynesian theory but I think the conclusions are accurate (especially in the long run).

Some excellent quotes.
Ronald Reagan , “The best possible social program is a job”
and
“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

Gerald R. Ford, “A government big enough to give you everything you want is a government big enough to take from you everything you have,” in an address to a joint session of Congress on August 12, 1974

Another Reagan Quote, “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

The present economic situation has the Democrats and their media allies invoking the Great Depression has a dire warning of what could happen if President Obama’s demands are not met. Unfortunately the vast majority of people do not realise that economics is a subject plagued with fallacies, ill-informed commentary and historical myths, especially concerning the Great Depression and economic history in general. It is this ignorance that is giving tax-mad Democrats the edge in an a political climate plagued with economic fears.

Without a doubt, the economic tragedy of the thirties was a turning point in economic history and whose ramifications are even now still making themselves felt through misguided economic policies. The two enduring myths of the Great Depression are that the free market failed and that President Hoover deepened the depression by implementing ‘orthodox’ economic policies. This misbegotten view of Hoover is a world-wide phenomenon. For instance, writing on Asia and the possibility of world deflation, Peter Hartcher (Australian Financial Review 19 December 1998), echoed the ‘received wisdom that by “acting in complete accord with the economic orthodoxy of the day”, Herbert Hoover created an economic nightmare[1. (And to think some readers still wonder why I have so much intellectual contempt for journalists)

Not a word of this is true. “The Great Engineer”, as Hoover was sometimes called, had never accepted what an ignorant media call the “economic orthodoxy of the day” or what others correctly call laissez-faire policies. It is indeed a curious irony that the man who laid the foundations for Roosevelt’s New Deal is still labelled by academics and journalists as an advocate of failed free-market policies. It is also a bitter commentary on those who are paid to know better, including those economists who pretend to be knowledgeable about the US economy of the 1920s and 1930s.

Now the “orthodox” economic prescription for depressions was to allow the market to liquidate the malinvestments that the preceding boom had — what the classical economists called “disproportionalities”2 — and allow prices and costs to adjust to proper market conditions. This policy was based on the vital insight that supporting unsound investments and trying to hold prices, especially wages, at boom-time levels would deepen and prolong a depression[3. The 1920-21 depression was the last time in American history that the wisdom of this policy was allowed to do its work.

The very short but sharp American post-war economic contraction that lasted from late 1918 to early 1919 was quickly followed by a massive credit expansion that generated the 1919-20 boom that the Federal Reserve belatedly checked by raising the discount rate. This triggered the sharpest and fastest depression in US history.

The volume of physical production dropped from 124.5 in 1920 to 103.9 in 1921. Wholesale prices peaked in May 1920 and then plummeted by an astonishing 45 per cent by May 1921. Despite this severe price fall, average non-agricultural wages declined by only 11 per cent. By August 1921 the economy was on the road to recovery. In 1922 the volume of production had risen to 121.6. Although unemployment rose from 1.2 per cent in 1920 to 11.2 per cent in 1921, it fell to 6.8 per cent the following and then to 1.7 per cent in 1923. Interest rate movements during this period tell an interesting story. The table below show that despite the fact that the fed discount never fell below 4 per cent the recovery was extremely swift. Today the fed cannot get the economy moving with an interest rate that is negative once we take inflation into account.

What brought about this remarkable recovery was the very “economic orthodoxy” that ill-informed journalists, economic advisors, and academics now sneer at. The Harding administration pursued a largely laisezz-faire policy during the 1920-21 crisis, allowing wages and other costs and prices to fall until the necessary price adjustments and liquidations had been made. Hoover, on the other hand, strongly opposed this policy, proposing large-scale interventionist policies instead.

On his return from Europe shortly after the war, he touted his “Reconstruction Program” that was based on government planning euphemistically called “voluntary” but which relied on “central direction”. From the moment he was appointed Secretary of Commerce in March 1921 he set about trying to intervene in the economy, designing several policies that he thought would help end the depression. Fortunately for America the depression ended before Hoover’s interventionist schemes could do any damage. That the laisezz-fair policy of “leave it alone” ended the depression so swiftly was a lesson Hoover never learnt.

The much maligned economics of old strongly advised that during deflationary periods[2 it was vital that prices, especially money wages, be allowed to adjust to the new monetary conditions. Only by this means could market clearing prices be established. It was clearly absurd to believe that boom-time money wage rates could be maintained during a deflation without causing lasting widespread unemployment. Hoover, however, detested “orthodox” thinking on wage rates, believing instead that living standards were a product of high real wages. He made his rejection of the “old economics” clear in a speech on 12 May 1926:

. . . not so many years ago — the employer considered it was in his interest to use the opportunities of unemployment and immigration to lower wages irrespective of other considerations. The lowest wages and longest hours were then conceived as the means to obtain lowest production costs and largest profits . . . The very essence of production is high wages and low prices, because it depends upon a widening . . . consumption, only to be obtained from the purchasing-power of high real wages and increased standard of living. (The Memoirs of Herbert Hoover Vol. II, The Cabinet and the Presidency, 1920-1933, New York, Macmillan, 1952, p. 108).

This was the “new economics” that Hoover and others now preached and which became the prevailing theory of the time. One could easily be forgiven for thinking that Hoover was a Keynesian before Keynes was. When depression struck in 1929, Hoover, as president, was now free to implement his interventionist (or should I say proto-Keynesian) schemes that gave the world the Great Depression.

He reacted swiftly to the crisis, persuading the country’s industrialists to maintain money wage rates at pre-depression levels. Alarmed by these interventionist policies, Secretary of Treasury Mellon urged him to allow the depression to follow its natural course as had all previous administrations. Not Hoover. He scornfully dismissed Mellon and his supporters as “leave-it-alone-liquidationists”. On 3 December, 1929, Hoover marked his annual address to Congress by stating:

I have instituted . . . systematic . . . cooperation with business . . . that wages and therefore earning power shall not be reduced and that a special effort shall be made to expand construction . . . a very large degree of individual suffering and unemployment has been prevented.

Unemployment was then about 3 per cent. Two days later he convened a large conference of business leaders. Urging them to accept his policies he condemned as the “dog-eat-dog attitude of the business”. ( The Memoirs of Herbert Hoover: The Great Depression 1929-1941, New York, Macmillan, 1952, p. 44). Not surprisingly the AF & L (American Federation of Labor) hailed Hoover’s policies and “new economics” as an advance of previous policies which had “intensified depressions”. The AF & L also praised his 1930-31 policies of reducing hours of work for government employees without loss of pay; maintaining money wage rates on public works and buildings; raising wages for government employees, etc. In October 1930 William Green presented Hoover to the AF & L annual conference, declared that:

The great influence which [Hoover] exercised upon that occasion [the White House Conferences] served to maintain wage standards — to prevent a general reduction of wages. As we emerge from this distressing period of unemployment we . . . understand and appreciate the value of the service which the President rendered wage earners of the country.

Unemployment now stood at 7.8 per cent. So much for recovery. In May 1931 Secretary Mellon publicly summed up Hoover’s views on wage rates by stating the administration’s determination to maintain the level of money wages. By the end of 1931 unemployment stood at 16.3 per cent. The tragic result of trying to maintain purchasing power. Nevertheless, in a report to Prime Minister Ramsey MacDonald, Keynes praised Hoover’s wage-fixing job-destroying policies. During his presidential campaign in late 1932 Hoover defended his interventionist program, claiming that

. . . we might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defence and counterattack ever evolved in the history of the Republic. . . . For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered . . . They were maintained until the cost of living had decreased and profits had virtually vanished. They are now the highest real wages in the world . . . We determined that we would not follow the advice of the bitter-end liquidationists [“orthodox economists”] . . .

By this time Hoover’s dangerous purchasing power theory of wages had driven unemployment up to 24.9 per cent. Hoover lost the election to Roosevelt who, nevertheless, continued with Hoover’s policies. The result was the longest and deepest depression in US history. Yet Hoover, the man who denounced proponents of “economic orthodoxy” as “reactionary . . . bitter-end liquidationists”, who supported the 1930 disastrous Smoot-Hawley tariff, who fixed wage-rates, implemented public works, established the Reconstruction and Finance Corporation, restrained competition, drastically raised taxes and government spending; the president who intervened in the economy on an unprecedented scale, breaching every tenet of laisezz-fair economics, is still accused by the historically illiterate journalists of having created the Great Depression because he adhered to the “economic orthodoxy of the day”.

Roosevelt’s New Deal ensured that unemployment never fell below 14 per cent and that the process of capital accumulation — the very thing that raises living standards — went into reverse. Despite this dreadful record his latter-day disciples are bizarrely arguing that the New Deal was a success. The Democrats own the Great Depression, a fact that is being confirmed by economic and historical research.

As we have seen, this view is a complete reversal of the truth.

1. How can journalists and others be so wrong? The answer, I regret to say, is our universities. It’s not just journalists who are at fault. Plenty of economic advisors are still pumping out the same nonsense.

2. Jevons expressed the classical view when he stated that

supplies must be suitable — that is, they must be in proportion to the needs of the population. Over-production is not possible in all branches of industry at once, but it is possible in some as compared with others. (W. Stanley Jevons, The Theory of Political Economy, fifth edition, Augustus M. Kelley, 1965, p. 203)

In other words, recessions are a confirmation of Say’s law and not a refutation. The imbalances that a recession reveal are the disproportionalities that were so well known to the classical economists.

3. Only the Austrian school of economics has been able to provide a satisfactory explanation of the great depression. Unfortunately the Australian media refuses to publish articles based on Austrian analysis. I suspect this is largely due to Australian journalists’ hostility to markets and their deep-rooted attachment to Keynesian economics and its rationale for large-scale government spending.

Fleeced, I didn’t say social housing is a good thing, just “a” thing. My point is simply that more is obtained for the money than just some supported jobs. But that is not to say we get value for the money.

In fact I believe most social housing is a good example of regulatory failure on 2 counts. first town planning restrictions limit the supply of cheap housing and second, government provided social housing breeds various problems.

You’re all missing the big picture!
WE should demand a government grant! ALSBLOG and Thoughts for Freedom perform a valuable public service, reaching lots of people, and giving hope of a better future ahead! That’s gotta be worth something! And we’re keeping people like ‘Diddums’ Jarrah off the streets!
WE deserve lots of money! The way they’re throwing it around, we should all get thousands each! Why should John Laws be the only one to get cash for comments?

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